I’ve been writing a lot of bearish articles over the past year and with the S&P 500 down close to 5% today, I’ll switch it up with a more upbeat sound. It’s already a bad enough day. John Rogers (Trades, Portfolio), CEO and CIO of Ariel Investments, appeared on CNBC Tuesday morning and shared his view on markets as well as a couple of interesting stock picks.
Madison Square Garden Networks (MSGN, Financial)
One of Rogers' favorite picks is Madison Square Garden Networks. On the recent earnings call, management explained how much tax reform will impact the business. The Guggenheim analyst then proceeded to bring his earnings estimate up from $2 to $3 which would put the company at 8x forward earnings.
The table below shows the analyst estimates Reuters tracks:
I’ve marked in green how the analyst estimates are shifting, but they are really only beginning to shift. Rogers could be on to something here, and it looks like an interesting company to explore. Even looking at the mean estimate for 2019 earnings, the company trades below 10x earnings. Such opportunities aren’t a dime a dozen currently. Not even after a couple of days of market turmoil.
As Rogers puts it: "It’s an extraordinary cheap stock."
In addition, Rogers believes we will see this type of adjustment happen time and time again because of tax reform. The effect will be most profound on domestic stocks because multinationals have usually been able to lower effective tax rates to a level closer to the new tax level.
Here are the firm's top positions as tracked by GuruFocus:
Lazard (LAZ)
Rogers is also bullish on European stocks and names Lazard. It is Ariel's third-largest holding. Lazard is a well-known banking and investing franchise from France. Its management team is very optimistic on Europe's economy.
From a valuation perspective, it is not immediately attractive, as trades at 31x earnings and 5.7x book value. A 2.8% dividend is nice but not exactly unique. When we consider the 8x free cash flow multiple, things start to look much more interesting:
Then there's the backdrop of the ongoing shift from active to passive investing. At some point that's going to reverse. It may not be tomorrow but with a net cash position, Lazard has the balance sheet to weather tough times.
Rogers outlook
To leave you with an upbeat outlook today, here is the video. Rogers did raise a modest amount of cash at the funds but doesn't expect we will see the market down 20% for the year. Perhaps a comforting thought today.
Ariel CEO: Why I continue to be bullish from CNBC.
Author: Long KKR